Less demand for goods reduces incentives to raise prices and inflation rates will fall.īut there are a large number of factors that can get in the way of this system working properly, The economy is complex, things get especially fuzzy when you try to pinpoint the timing and size of an interest rate hike’s economic impact. That takes money out of the economy, and eventually spending will stall. It also makes businesses less profitable, and they typically hire less. Those hikes then filter through the rest of the economy as banks make up for pricier loans by increasing the cost of lending for households and businesses. Here’s how the system works: First, the Fed raises interest rates for overnight loans between financial institutions. Instead there’s a flow of monetary policy through the economy. What’s happening: As much as Federal Reserve officials wish they could, they can’t just wave a wand and lower inflation rates. After 10 consecutive interest rate hikes, Federal Reserve officials announced on Wednesday that they would pause their fight against inflation to figure out whether the US economy was fully absorbing all that harsh medicine.įollowing the policy announcement, Fed Chair Jerome Powell noted that rate hikes typically filter through the economy with “uncertain lags.” In other words, the Fed has been playing an (educated) guessing game, taking action before it understands the results.īut the trick is the Fed doesn’t even know how long these lags may last between a rate hike and its effect on inflation.
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